SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Check One
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2002
or
|_| Transition pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 from _______ to ______
Commission file number 0-12500
ISRAMCO, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3145265
(State or other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification Number
11767 Katy Freeway, Houston, TX 77079
(Address of Principal Executive Offices)
713-621-3882
(Registrant's Telephone Number, Including Area Code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of the registrant's Common Stock as of
November 14, 2002, was 2,639,853.
PART I - FINANCIAL INFORMATION:
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2002
and December 31, 2001 1
Consolidated Statements of Operations for the three and nine months
ended September 30, 2002 and 2001 2
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 3
Notes to Consolidated Financial Statements 4
Item 2. Management's discussion and analysis of financial statements 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Disclosure Controls and Procedures 14
PART II. OTHER INFORMATION 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities & Use of Proceeds 16
Item 3. Defaults upon senior securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 18
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except for share information)
(Unaudited)
September 30, December 31,
2002 2001
---- ----
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,290 $ 4,280
Marketable securities, at market 3,058 2,847
Accounts receivable 495 455
Prepaid expenses and other current assets 287 112
-------- --------
Total current assets 5,130 7,694
Property and equipment (successful efforts method for oil and gas
properties) 3,380 4,180
Real Estate 1,887 --
Marketable securities, at market 7,973 7,611
Investment in affiliates 8,450 6,227
Deferred tax asset 1,247 732
Other 221 171
-------- --------
Total assets $ 28,288 $ 26,615
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses 1,891 1,160
-------- --------
Total current liabilities 1,891 1,160
-------- --------
Commitments, contingencies and other matters
Shareholders' equity:
Common stock $.0l par value; authorized 7,500,000
shares; issued 2,669,120 shares; outstanding
2,639,853 at June 30,2002 27 27
and December 31,2001
Additional paid-in capital 26,240 26,240
Retained earnings (accumulated deficit) 1,143 (784)
Accumulated other comprehensive income (849) 136
Treasury stock, 29,267 shares at
June 30, 2002 and December 31, 2001 (164) (164)
-------- --------
Total shareholders' equity 26,397 25,455
-------- --------
Total liabilities and shareholders' equity $ 28,288 $ 26,615
======== ========
See notes to the consolidated financial statements.
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ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for share information)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES:
Operator fees from related party $ 52 $ 50 $ 199 $ 185
Oil and gas sales 589 604 1,730 2,438
Interest income 199 100 604 408
Office services to related party 181 248 694 699
Gain on Marketable securities -- -- -- --
Other Income 26 -- 26 --
----------- ----------- ----------- -----------
Total revenues 1,047 1,002 3,253 3,730
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Interest expense 10 -- 198 --
Depreciation, depletion and
amortization 118 114 349 335
Dry hole costs -- -- 1,657 --
Lease operating expenses and
severance taxes 147 192 584 520
Exploration costs 79 35 113 83
Operator expense 255 179 597 503
General and administrative 320 294 1,066 873
Loss on marketable securities 92 141 350 183
Equity in net loss of investees 86 324 392 391
----------- ----------- ----------- -----------
Total expenses 1,107 1,279 5,306 2,888
----------- ----------- ----------- -----------
Income (loss) before income taxes (60) (277) (2,053) 842
Income taxes -- 100 464 (300)
----------- ----------- ----------- -----------
Net income (loss) from continuing operation (60) (177) (1,589) 542
=========== =========== =========== ===========
Cumulative Effect of Accounting change -- -- 3,516 --
----------- ----------- ----------- -----------
Net income (Loss) $ (60) $ (177) $ 1,927 $ 542
=========== =========== =========== ===========
Earnings per common share-basic
continuing operation $ (0.02) $ 0.07 $ (0.60) $ 0.21
Cumulative Effect of Accounting change -- -- $ 1.33 --
----------- ----------- ----------- -----------
$ (0.02) $ 0.07 $ 0.73 $ 0.21
=========== =========== =========== ===========
Weighted average number of shares
outstanding-basic 2,639,853 2,639,853 2,639,853 2,639,853
=========== =========== =========== ===========
Earnings per common share-diluted
continuing operation $ (0.02) $ 0.07 $ (0.60) $ 0.20
Cumulative Effect of Accounting change -- -- $ 1.33 --
----------- ----------- ----------- -----------
$ (0.02) $ 0.07 $ 0.73 $ 0.20
=========== =========== =========== ===========
Weighted average number of shares
outstanding-diluted 2,639,853 2,639,853 2,639,853 2,661,027
=========== =========== =========== ===========
See notes to the consolidated financial statements.
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ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
September 30,
-------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 1,927 542
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 349 335
Dry hole costs 1,657 --
Loss on marketable securities 350 183
Equity in net loss of investees 392 391
Cumulative effect of an Accounting change (3,516) --
Deferred taxes (464) --
Changes in assets and liabilities:
Accounts receivable (40) 395
Prepaid expenses and other current assets (175) 308
Other assets -- (66)
Accounts payable and accrued liabilities 730 (227)
------- -------
Net cash provided by operating activities 1,210 1,861
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Addition to property and equipment (1,215) (1,789)
Purchase of Real Estate (1,887) --
Purchase of marketable securities (2,970) (6,812)
Proceeds from sale of equipment 10 --
Proceeds from sale of marketable securities 1,912 803
Purchase of investment in affiliate -- (845)
Purchase of convertible from promissory note (50) --
------- -------
Net cash (used in) investing activities (4,200) (8,643)
------- -------
NET decrease IN CASH AND CASH EQUIVALENTS (2,990) (6,782)
Cash and cash equivalents-beginning of year 4,280 12,706
------- -------
Cash and cash equivalents-end of period 1,290 5,924
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest -- --
======= =======
Cash paid during the period for taxes -- 25
======= =======
See notes to the consolidated financial statements.
-3-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
As used in these financial statements, the term "Company" refers to Isramco,
Inc. and subsidiaries.
NOTE 2
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of Management, all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation have been included. Results for the
nine month and three month period ended September 30, 2002, are not necessarily
indicative of the results that may be expected for the year ended December 31,
2002. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2001. Certain re-classification of prior year
amounts have been made to conform to current presentation.
NOTE 3 - Consolidation
The consolidated financial statements include the accounts of the Company, its
direct and indirect non U.S. based wholly-owned subsidiaries Isramco Oil and Gas
Ltd. (Oil and Gas), Isramco B.V., a Netherlands company and Isramco Resources
Inc., a British Virgin Islands company, and its wholly owned subsidiaries, Jay
Petroleum, L.L.C. (Jay), Jay Management L.L.C. (Jay Management) and IsramTec
Inc. (IsramTec). Intercompany balances and transactions have been eliminated in
consolidation.
NOTE 4 - New Accounting Pronouncements
A. In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and
Intangible Assets. Statement 141 requires that the purchase method of accounting
be used for all business combinations completed from July 1, 2001. Statement 141
also specifies that types of acquired intangible assets that are required to be
recognized and reported separately from goodwill and those acquired intangible
assets that are required to be included in goodwill. Statement 142 will require
that goodwill no longer be amortized, but instead tested for impairment at least
annually. Statement 142 will also require that recognized intangible assets be
amortized over their respective estimated useful lives. Any recognized
intangible asset determined to have an indefinite useful life will not be
amortized, but instead tested for impairment in accordance with Statement 142
until its life is determined to no longer be indefinite.
The Company adopted Statement 141 and Statement 142 on January 1, 2002.
Statement 141 requires the Company to evaluate its existing intangible assets
and goodwill and to make any necessary reclassifications in order to conform to
the new separation requirements at the date of adoption. Upon adoption of
Statement 142, the Company will be required to reassess the useful lives and
residual values of all intangible assets.
In connection with the transitional impairment evaluation, Statement 142
requires the Company to perform an assessment of whether there is an indication
that goodwill is impaired as of January 1, 2002. To accomplish this, the Company
must (1) identify its reporting units, (2) determine the carrying value of each
reporting unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units, and (3) determine the
fair value of each reporting unit. This first step of the transitional
assessment is required to be completed by June 30, 2002. If the carrying value
of any reporting unit exceeds its fair value, then detailed fair values for each
of the assigned assets (excluding goodwill) and liabilities will be determined
to calculate the amount of goodwill impairment, if any. The difference
-4-
between total fair value as defined above and carrying value of all the
reporting segments is defined as the 'fair value' of the goodwill. If the fair
value of the goodwill is lower than its carrying value, the Statement requires
that the difference be included in goodwill. This is the second step in
assessing the impairment and it must be completed as soon as possible, but no
later than December 31, 2002. Any transitional impairment loss will be
recognized as the effect of a change in accounting principle in the Company's
statement of earnings and will be recorded retroactively to January 1, 2002.
In the current period the Company applied the instructions of SFAS 141.
Accordingly the company recognized a gain of $3,516,000 as the effect of a
change in accounting principle. The gain was included as a cumulative effect of
a change in accounting policy.
B. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS No.144). SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future cash flows
expected to be generated by the asset or used in its disposal. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized. In addition, SFAS 144 requires the Company to show separately
operations which have been disposed of (sold, abandoned or liquidated) or
classified as held for sale. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell. The Company adopted
SFAS No. 144 from January 1, 2002.
NOTE 5 - Oil and Gas Properties
Although the company continues to seek to acquire oil and gas properties, no
such purchases were made in the nine months period ended September 30, 2002.
In the nine month period ended September 30, 2002, drilling costs in the amount
of $374,000 were capitalized.
In December 2001, drilling commenced on the Read 1 well in Texas. Based on the
completed Production tests, in May 2002 the Company decided to plug and abandon
the well. The aggregate drilling expenditures with respect to the Read 1 well
were approximately $874,000.
During 2000 the operator of Marine 9 completed geological and geophysical
studies for the purpose of identifying and confirming the existence of oil
prospects. Based on the results of the electrical logging survey,, in June 2002
the operator recommended that the well be plugged and abandoned, which
recommendation was accepted.
The Company expended approximately $809,000 in connection with the drilling in
Marine 9 In the Congo.
NOTE 6 - Real Estate
In June 2002, the Company purchased non-oil and gas producing real estate in
Israel in the amount of $1,887,000.
Concurrently with the purchase of the real estate, the Company entered into a
lease agreement with a third party to lease the property for a 24-month period
at a monthly rent of $7,000.
-5-
NOTE 7 - Earnings Per Share Computation
SFAS No. 128 requires a reconciliation of the numerator (income) and denominator
(shares) of the basic earnings per share ("EPS") computation to the numerator
and denominator of the diluted EPS computation. The Company's reconciliation is
as follows:
For the Three Months Ended September 30,
----------------------------------------
2002 2001
---- ----
Loss Shares Loss Shares
---- ------ ---- ------
Earnings per common share-Basic $ (60,000) 2,639,853 $ (177,000) 2,639,853
Effect of dilutive securities:
Stock Options -- -- -- --
---------- ---------- ---------- ----------
$ (60,000) 2,639,853 $ (177,000) 2,639,853
========== ========== ========== ==========
For the Nine Months Ended September 30,
---------------------------------------
2002 2001
---- ----
Income Shares Income Shares
------ ------ ------ ------
Earnings per common share-Basic $1,927,000 2,639,853 $ 542,000 2,639,853
Effect of dilutive securities:
Stock Options -- -- -- 21,174
---------- ---------- ---------- ----------
$1,927,000 2,639,853 $ 542,000 2,661,027
========== ========== ========== ==========
NOTE 8 - Geographical Segment Information
The Company's operations involve a single industry segment--the exploration,
development, production and transportation of oil and natural gas. Its current
oil and gas activities are concentrated in the United States, Israel, and the
Republic of Congo, Africa. Operating in foreign countries subjects the Company
to inherent risks such as a loss of revenues, property and equipment from such
hazards as exploration, nationalization, war and other political risks, risks of
increases of taxes and governmental royalties, renegotiation of contracts with
government entities and changes in laws and policies governing operations of
foreign-based companies.
The Company's oil and gas business is subject to operating risks associated with
the exploration, and production of oil and gas, including blowouts, pollution
and acts of nature that could result in damage to oil and gas wells, production
facilities or formations. In addition, oil and gas prices have fluctuated
substantially in recent years as a result of events, which were outside of the
Company's control. Financial information, summarized by geographic area, is as
follows (in thousands):
-6-
Geographic Segment
United Consolidated
States Israel Africa Total
------ ------ ------ -----
Identifiable assets at September 30, 2002 $ 3,027 $ 72 $ 150 $ 3,249
Cash and corporate assets $ 25,039
--------
Total Assets at September 30, 2002 $ 28,288
========
Identifiable assets at December 31, 2001 $ 3,818 $ 72 $ 150 $ 4,040
Cash and corporate assets $ 22,575
--------
Total Assets at December 31, 2001 $ 26,615
========
Nine Month Ended September 30, 2002
Sales and other operating revenue $ 1,836 $ 787 $ -- $ 2,623
Costs and operating expenses $ (1,792) $ (621) $ (887) $ (3,300)
-------- -------- -------- --------
Operating profit $ 44 $ 166 $ (887) $ (677)
======== ======== ========
Interest Income, net $ 406
General corporate expenses $ (1,066)
Loss on marketable securities and
equity in net loss of investees $ (742)
Other Income $ 26
Income taxes $ 464
--------
Net Loss from continuing operations $ (1,589)
========
United Consolidated
States Israel Africa Total
------ ------ ------ -----
Three Months Ended September 30, 2002
Sales and other operating revenue $ 622 $ 199 $ -- $ 821
Costs and operating expenses $ (255) $ (265) $ (78) $ (598)
-------- -------- -------- --------
Operating profit $ 367 $ (66) $ (78) $ 223
======== ======== ========
Interest Income $ 189
General corporate expenses $ (320)
Loss on marketable securities and equity in net loss of investee $ (178)
Other Income $ 26
Income taxes $ --
--------
Net Income from continuing operations $ (60)
========
-7-
United Consolidated
States Israel Africa Total
------ ------ ------ -----
Nine Months Ended September 30, 2001
Sales and other operating revenue $ 2,512 $ 810 $ -- $ 3,322
Costs and operating expenses $ (837) $ (521) $ (83) $ (1,441)
-------- -------- -------- --------
Operating profit $ 1,675 $ 289 $ (83) $ 1,881
======== ======== ========
Interest Income, net $ 408
General corporate expenses $ (873)
Loss on marketable securities and
equity in net loss of investees $ (574)
Income taxes $ (300)
--------
Net Income from continuing operations $ 542
========
United Consolidated
States Israel Africa Total
------ ------ ------ -----
Three Months Ended September 30, 2001
Sales and other operating revenue $ 637 $ 265 $ -- $ 902
Costs and operating expenses $ (299) $ (187) $ (34) $ (520)
-------- -------- -------- --------
Operating profit $ 338 $ 78 $ (34) $ 382
======== ======== ========
Interest Income $ 100
Loss on marketable securities and equity in net loss of investee $ (465)
General corporate expenses $ (294)
Income tax benefit $ 100
--------
Net loss from continuing operations $ (177)
========
-8-
NOTE 9 - Comprehensive income (loss)
The Company's comprehensive income (loss) for the Three and Nine month periods
ended September 30, 2002 and 2001 was as follows:
Nine months ended
September 30,
2002 2001
---- ----
Net Income (Loss) $ 1,927 $ 542
Other comprehensive gain (loss)
- -available - for - sale securities $ (82) $ (160)
- -foreign currency translation adjustments $ (901) $ (140)
-------- --------
Comprehensive income (loss) $ 944 $ 242
======== ========
Three months ended
September 30,
2002 2001
---- ----
Net Income (Loss) $ (60) $ (177)
Other comprehensive gain (loss)
- -available - for - sale securities $ 169 $ 33
- -foreign currency translation adjustments $ (180) $ (79)
-------- --------
Comprehensive income (loss) $ (71) $ (223)
======== ========
NOTE 10 - Contingencies
The Company is a defendant in a lawsuit brought by a contractor relating to
drilling costs of the Tilapia well in Congo during 2000. The Company believes
that it has adequately accrued for all amounts due to this contractor as of
September 30, 2002.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this document as well as
statements made in press releases and oral statements that may be made by the
Company or by officers, directors or employees of the Company acting on the
Company's behalf that are not statements of historical or current fact
constitute "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown factors that could cause the actual results of the
Company to be materially different from the historical results or from any
future results expressed or implied by such forward looking statements.
Liquidity and Capital Resources
The decrease in the Company's consolidated cash and cash equivalents of
$2,990,000 from $4,280,000 at December 31, 2001 to $1,290,000 at September 30,
2002, is primarily attributable to the purchase of non-oil and gas real estate
located in Israel and investing activities.
Net cash used in investing activities for the nine months period ended
September 30, 2002 was $4,200,000 compared to $8,643,000 used for the comparable
nine month period in 2001. Net cash used during the nine month period ended
September 30, 2002 was used primarily for the purchase of marketable securities,
capitalization of drilling costs expended during the period and purchase in June
2002 of non oil and gas producing real estate located in Israel at an aggregate
cost of $1,887,000. The real estate is located in an area that is currently
zoned for agricultural purposes. Concurrently with the purchase of the real
estate, the Company entered into a lease agreement with an unaffiliated third
party to let the entirety of such property for a 24 month period at a monthly
rent of $7,000.
The Company believes that existing cash balances and cash flows from
activities will be sufficient to meet its financing needs. The Company intends
to finance its ongoing oil and gas exploration activities from working capital.
Results of Operations
Nine Months Ended September 30, 2002 (the "2002 Period") Compared to Nine
Months Ended September 30, 2001 (the "2001 Period") and the Three Months Ended
September 30, 2002 Compared to the Three Months Ended September 30, 2001
The Company reported net income of $1,927,000 ($0.60 per share) for the
2002 Period compared to net income of $542,000 ($0.21 per share) for the 2001
Period and a loss of $60,000 ($0.02 per share) for the three months ended
September 30, 2002 compared to net loss of $177,000 ($0.07 per share) for the
comparable period in 2001. The relatively higher net income for the 2002 Period
compared to the income for the 2001 Period is primarily attributable to non-cash
income in the amount of $3,516,000 booked in the 2002 Period as a result of the
cumulative effect of accounting changes deriving from the Company's adoption, as
of January 1st 2002, of SFAS 141 "Business Combination" and SFAS 142 "Goodwill
and Intangible Assets". The relatively lower net loss for the three months ended
September 30, 2002 compared to the net loss for the three months ended September
30, 2001 is primarily attributable to a reduction in the losses associated with
marketable securities and investment in affiliates.
-10-
Set forth below is a break-down of these results.
United States
Oil and Gas Revenues (in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Oil Volume Sold (Bbl) 5 4 16 14
Gas Volume Sold (MCF) 186 149 555 480
Oil Sales ($) 128 100 350 368
Gas Sales ($) 460 564 1,377 2,070
Average Unit Price
Oil ($/Bbl) * $24.49 $24.65 $21.26 $25.46
Gas ($/MCF) ** $2.48 $3.39 $2.48 $4.31
* Bbl - Stock Market Barrel Equivalent to 42 U.S. Gallons
** MCF - 1,000 Cubic Feet
Summary of Exploration Efforts in Israel
To date, three gas fields were discovered offshore Israel known
respectively as Or, Or South and Nir. Based on the gas finds, a 30 year lease
(including the area of the Or gas discovery) was granted in June 2000
(hereinafter, the "Med Yavne Lease") and an additional 30 year lease (including
the area of the Nir gas discovery) was granted in January 2002 (hereinafter, the
"Med Ashdod Lease").
Med Yavne Lease
The Med Yavne Lease covers 145 square kilometers (approximately 35,000
acres). The grant of the Med Yavne Lease provided that the commencement of a
drilling by July 1, 2002 of at least one well. If drilling is not commenced by
such date, then approximately 92 kilometers (approximately 23,000 acres) of the
lease area will be forfeited. The processing and interpretation of a 3D seismic
survey covering the Med Yavne Lease were performed and, based on these results,
a detailed mapping of the gas discoveries, as well as a number of additional gas
prospects in the Med Yavne Lease, were drawn up. However, subsequent tests with
respect to the additional identified prospects established that these prospects
are highly uncertain and, accordingly, BG International Limited, a member of the
British Gas Group ("BG") and the operator of the Med Yavne Lease, recommended
not to commence any drilling with respect to such prospects, which
recommendation was accepted. Accordingly, approximately 92 kilometers
(approximately 23,000 acres) were forfeited.
The Company's participation share of the Med Yavne Lease is 0.4585%.
-11-
Med Ashdod Lease
Based on the Nir I discovery, in January 2002 the Israel Petroleum
Commissioner advised the license participants that they had been granted the Med
Ashdod Lease covering 250 square kilometers (approximately 62,000 acres). The
Company serves as the operator of the Med Ashdod Lease and holds a 0.3625%
interest therein.
Exploration efforts are currently focused on the southern part of the
lease, where three potential prospects have been identified on the 3D seismic
data set. Special processing of seismic data has been performed to evaluate the
prospects for gas in the area. The entire data set was furnished to an
independent consultant for the purpose of performing a study and evaluation of
the area.
Based on the consultant's findings, two prospects within the southern
sector have been identified and recommended for drilling, one of which is for
gas and the second for gas or oil.
The operator has examined this report and, based thereon, has established
the priorities for continued exploration. The operator presented its
recommendation to the lease participants in October 2002 that that drilling be
commenced for oil. Pending the decision of the participants, no drilling
activities are currently being undertaken.
Marine North Licenses
In June 1999, the Company was awarded a preliminary permit referred to as
the Marine North/164 covering an area of 575 square kilometers offshore Israel.
The permit included a preferential right to obtain a license. In December 2000
two licenses were issued in respect of the area covered by the permit
(hereinafter, respectively, "Marine North A" and "Marine North B" and
collectively, the "Marine North Licenses"), which licenses continue in effect
through December 3, 2003. The Company holds a 1% interest in each of the Marine
North Licenses and the remaining interests are held by affiliated entities. In
April 2002, the Marin North Licenses were abandoned as the identifiable
prospects appeared highly uncertain.
Marine Center License
In September 1999, the Company was awarded a preliminary permit, Marine
Center, covering an area of 194 square kilometers. The permit included a
preferential right to obtain a license. In December 2000, the Israeli Petroleum
Commissioner issued a license in respect of the area covered by the permit
(hereinafter, the "Marine Center License"), which license continues in effect
through December 3, 2003. The Company holds a 1% participation interest in the
Marine Center License and the remaining interests are held by affiliated
entities.
The Company serves as operator of the Marine Center License.
Marine South License
In January 2000, the Company was awarded an offshore preliminary permit
known as Marine South, covering an area of approximately 142 square kilometers
offshore Israel known as "Marine South" and an additional permit known as
"Marine South B", covering an area of approximately 40 square kilometers
offshore Israel. The permits include a preferential right to obtain a license.
In January 2002, Israeli Petroleum Commissioner issued a license in respect of
the area covered by the Marine South permit (hereinafter, the "Marine South
License"), which license continues in effect through January 15, 2005 and is
subject to (i) the performance of a seismic 3D survey and the processing of the
results thereof no later than January 15, 2003, (ii) the
-12-
preparation of an oil drilling prospect by July 15, 2003 and (iii) the drilling
of a well no later than January 15, 2004. The Company serves as operator of the
License and holds a 1% participation interest in the License; the remaining
participation interests are held by affiliated entities.
A 2D seismic survey covering the Marine South License area was performed
and the survey results were processed and interpreted. Preliminary results
indicated the possible presence of gas. It is anticipated that a 3D seismic
survey will be undertaken with respect to Marine South to enable a more accurate
mapping of gas prospects.
Summary of Exploration Efforts in the United States
The Company, through its wholly-owned subsidiaries, Jay Petroleum LLC
("Jay Petroleum") and Jay Management LLC ("Jay Management"), is involved in oil
and gas production in the United States. Jay Petroleum owns varying working
interests in oil and gas wells in Louisiana, Texas, Oklahoma and Wyoming.
Independent estimates of the reserves held by Jay Petroleum as of December 31,
2001 are approximately 140,000 net barrels of proved developed producing oil and
4,424 MMCFs of proved developed producing natural gas. Jay Management acts as
the operator of certain of the producing oil and gas interests owned or acquired
by Jay Petroleum.
In December 2001, drilling commenced on the Read 1 well in Texas. Based on
the completed production tests, in May 2002 the Company decided to plug and
abandon the well. The aggregate drilling expenditures with respect to the Read 1
well were approximately $848,000.
Summary of Exploration Efforts in the Congo
The oil and gas properties in the Congo consist of the Marine III
Exploration Permit and the Marine 9 Exploration Permit. The Company holds 25%
participation interest in the Marine III Exploration Permit (through Naphtha
Congo Ltd). The Company's participation interest in the Marine 9 Exploration
Permit is 5% (through Naphtha Congo Limited Partnership). The remaining
participants in the Marine 9 License are recognized widely-known oil companies.
In the course of 2001, the operator of Marine 9 completed geological and
geophysical studies for the purpose of identifying and confirming the existence
of oil prospects. In October 2001, the operator recommended to drill a well at
an estimated budget of $12.8 million (not including production tests). Drilling
commenced in May 2002. Based on the results of the electrical logging survey, in
June 2002 the operator recommended that the well be plugged and abandoned, which
recommendation was accepted.
Operator's Fees
During the 2002 Period, the Company earned $199,000 in operator fees
compared to $185,000 for the 2001 Period and $52,000 for the three months ended
September 30, 2002 compared to $50,000 for the comparable period in 2001.
Oil and Gas Revenues
For the 2002 Period, the Company had oil and gas revenues of $1,730,000
compared to $2,438,000 for the 2001 Period and $589,000 for the three months
ended September 30, 2002 compared to $604,000 for the comparable period in 2001.
The decrease in the 2002 Period is primarily attributable to decreased oil & gas
prices.
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Lease Operating Expenses and Severance Taxes
Lease operating expenses and severance taxes were primarily in connection
with oil and gas fields in the United States. Oil and gas lease operating
expenses and severance taxes for the 2002 Period were $584,000 compared to
$520,000 for the 2001 Period and $147,000 for the three months ended September
30, 2002 compared to $192,000 for the comparable period in 2001. The increase in
lease operating expenses during the 2002 Period as compared to the 2001 Period
is primarily attributable to the higher operating expenses associated with the
purchase of new producing wells in July 2001.
Interest Income
Interest income in respect of the 2002 Period was $604,000 compared to
$408,000 for the 2001 Period and $199,000 in respect of the three months ended
September 30, 2002 compared to $100,000 for the same period in 2001. The
increase in interest income earned by the company during the three months ended
September 30, 2002 compared to the comparable period in 2001 is primarily
attributable to interest earned on marketable securities.
Gain (loss) on Marketable Securities
During the 2002 Period, the Company recognized a net realized loss on
trading securities of $350,000 compared to losses of $183,000 for the 2001
Period and a loss of $92,000 for the three months ended September 30, 2002
compared to a gain of $141,000 for the same period in 2001.
Increases or decreases in the gains and losses from marketable securities
are dependent on the market prices in general and the composition of the
portfolio of the Company.
Operator Expense
Operator expenses were incurred primarily in connection with oil and gas
fields in the United States and in connection with the offshore activities in
Israel. Operator expenses for the 2002 Period were $597,000 compared to $503,000
for the 2001 Period and $255,000 for the three months ended September 30, 2002
compared to $179,000 for the comparable period in 2001.
General and Administrative Expenses
General and administrative expenses for the 2002 Period were $1,066,000
compared to $873,000 for the 2001 Period and $320,000 for the three months ended
September 30, 2002 compared to $294,000 for the same period in 2001. The
increase during the 2002 Period compared to the 2001 Period is primarily
attributable to expenses incurred in the provision of professional services by
related and third parties.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Market risks relating to changes in interest rates and foreign currency
exchanges rates were reported in Item 7A of the Company's Annual Report on Form
10-K for the year ended December 31, 2001. There has been no material change in
these market risks since the end of the fiscal year 2001.
ITEM 4. Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms,
and that such information is accumulated and communicated to the Company's
management, including its Chief Executive Officer and Principal Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
Within the 90 days prior to the filing date of this report on Form 10-Q,
the Company carried out an evaluation, under the supervision and with the
participation of the Company's Chief Executive and Principal Financial Officer,
of the effectiveness of the design and operation
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of the Company's disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14). Based upon that evaluation, the Chief Executive and
Principal Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting him to material information relating
to the Company (including its consolidated subsidiaries) required to be included
in the Company's periodic SEC filings. Subsequent to the date of that
evaluation, there have been no significant changes in internal controls or in
other factors that could significantly affect internal controls.
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PART II
Item 1. Legal Proceedings
The Company, together with Naphtha Congo Ltd., an Israeli and related
entity ("Naphtha Congo"), were served in October 2002 with a summons and
complaint by Romfor International, Ltd., a contractor ("Contractor") who
provided drilling services in the Tilapia permit in the Congo, alleging breach
of contract and damages of approximately $1.5 million and moving for court
ordered arbitration. The Company filed its answer on October 18, 2002, wherein
it denied all allegations made and denied that it is a proper party to the suit.
The suit is pending before the District Court of Harris County, Texas.
The Contractor and Naphtha Congo entered into a drilling agreement in
October 2000 with respect to the Tilapia 1 well. The Company indirectly held,
through Naphtha Congo, a 50% participation interest in the Tilapia 1 well. In
January 2001, the Company abandoned the Tilapia permit.
The Company previously disclosed in its quarterly reports during 2002 on
Form 10-Q and its annual report on Form 10-K that it, together with Naphtha
Congo and Naphtah Israel Petroleum Corp., an Israeli and related entity
("Naphtha Israel"), received notice in March 2001 from counsel for the
Contractor of a claim by Contractor against Naphtha Congo in the original
approximate amount of $1.2 million in respect of drilling services rendered.
Naphtha Congo disputes the amount claimed and has claimed offsetting damages
caused to it by the Contractor.
Item 2. Change in Securities & Use of Proceeds
Not Applicable
Item 3. Default Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on 8-K
(i) Exhibits
99.1 Certification of Chief Executive and Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of he
Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ISRAMCO, INC.
Registrant
Date: November 14, 2002 By /s/ Haim Tsuff
Chairman of the Board,
Chief Executive Officer
and Principal Financial
Officer
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CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
OF 2002
I, Haim Tsuff, Chief Executive and Principal Financial Officer of Isramco,
Inc. (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Isramco, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the period presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and I have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to me by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report my conclusions and about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the Company's
auditors and the audit committee of Company's board of directors (or persons
fulfilling the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of the most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Haim Tsuff
Haim Tsuff
Chief Executive Officer
(and Principal Financial
Officer)
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